Exactly two years ago, Zhou Xiaochuan, the Governor of PBOC called for "an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run…. The SDR has the features and potential to act as a super-sovereign reserve currency".
However, for the last one year, structural defects in the current experiment in a super sovereign currency, the Euro, has come to the fore. The European bond and currency markets have seen unprecedented volatility stemming from the structural and design defects in the Euro, which this weekly newsletter has also pointed out from time to time.
At the same time, Mr. Xiaochuan was also right in pointing out that “the issuing countries of reserve currencies cannot maintain the value of the reserve currencies while providing [for growing needs of] liquidity to the world”.
To solve this critical issue, the policy makers across the world will have to invest significant resources to ensure further evolution of human consciousness. We humans, like any other mammals, have a hard wired consciousness centered on preservation of the self and the immediate dependents. This consciousness has been further modified by the evolutionary needs of a hunting pack, with allegiance to a small group.
In the last 10,000 years, the great kingdoms of yesteryears had been able to expand that consciousness to outward allegiance to the head of a very large group, the King. This expansion of consciousness has been achieved on the twin premises - the provision of safety & prosperity, and the threat of persecution.
Since 1750s, first, the seminal thinking of Jean-Jacques Rousseau, and then, the French and the American revolutions based largely on his thoughts, has greatly modified the human consciousness to outwardly align to a republic. This early expansion, and later modification of human consciousness, is the foundation on which successful national currencies are built.
Even today, when the economies of the world have become highly integrated through trade and capital flows, there is no alignment of human consciousness to one single global human community. We are far away from achieving the collective consciousness of a hive of honeybees. Without single global human community, we cannot simply have a supra national currency.
However, now, we have a tool, in the form of the internet, to achieve a sense of oneness across the globe. The spread of the Jasmine Revolution across the MENA region in the last three months shows that ordinary people are willing to form a global consciousness, well beyond the boundaries of traditional nation states.
Sadly, although we have the tool (internet) for achieving a global consciousness, we lack two major ingredients. First, we do not have the seminal thinking at par with Rousseau to give us the theoretical (and not commercial) underpinning for a global community; and second, we still do not have leaders who believe in a single global community.
Unless that happens, PBOC will have no choice but to use Dollar as its main reserve currency, and to experience, every waking moment, the wartime quote of John Maynard Keynes “Owe your banker £1000 and you are at his mercy; owe him £1 million and the position is reversed.” And maybe that will force PBOC to look at GLD as a more significant diversification tool someday.